West Midlands council leaders worried by Osborne's rates shake-up

George Osborne hailed his plan a 'devolution revolution' to shake-up the way local government is funded.

The system under which cash raised from rates is sent to Whitehall to be redistributed in grants to town halls around the country is to be abolished, along with the uniform business rate which imposes a single tax rate on every council.

Business rates have long been a bugbear for traders trying to make ends meet. Chancellor George Osborne knows it will help create jobs if he allows councils to cut them.

And by making them compete with each other to become the most attractive, he offers the potential of high streets revived and thriving.

The devil is in the detail.

For a start it means a change in the spirit of co-operation between councils. For those who are thinking about teaming up in the so-called West Midlands Combined Authority, it presents an incentive.

An elected 'metro mayor' will have the power to pool business rates and dish them out between the different areas based on what they need and what they plan to do.

The Chancellor is making it all the more difficult to go it alone. Those that do will have to compete with the emerging 'northern powerhouse' he is so fond of as well as the larger cities and the better-off shire counties.

There is simply no choice for a metropolitan borough to treat itself as an island in what is going to become a fiercely competitive environment.

Councils in areas like the Black Country have long received more back from the centrally-held pot of business rates than areas that are better off.

Affluent areas already have a healthy mix of shops and are also the ones that will be able to afford to compete.

What is needed in some town centres, particularly those with a large number of empty shops is radical action to tackle derelict buildings and create the right environment for growth.

The old system meant that richer areas subsidised poorer ones.

That may have allowed some authorities to rest on their laurels and not see business as an essential part of their communities.

After all, businesses do not have a vote the way that residents do.

What Mr Osborne has now given to traders, however, is the opportunity to vote with their feet.

The only way to afford public services, the ones that councils provide, is to have an economy that is growing, where the private sector can create jobs and where people can spend their wages in the towns and cities where they work and live.

Our councils must pull out all the stops to keep the businesses they have and attract more.

They are now in competition with each other.

In future, councils will be freed to cut business rates to attract new jobs, and elected mayors in places like London, Manchester and Sheffield will be allowed to add a premium to rates to pay for major infrastructure projects.

The move is likely to mean a West Midlands Combined Authority 'metro mayor' would have the same power.

The reform was announced in the Chancellor's speech to the Conservative annual conference in Manchester, as he claimed the mantle for the Tories as 'the builders' with a plan for a prosperous future for working people.

But Wolverhampton's council leader Roger Lawrence said: "We need to understand what its impact will be.

"Places like Westminster, Southwark and Camden have business rates that are enormous. We do not."

And Councillor Darren Cooper, who leads Labour run Sandwell Council, said: "This might benefit the leafier suburbs but not places like Sandwell. We currently receive a larger share of the business rate pot based on need.

"Metropolitan boroughs need a lot more detail."

Henry Carver, president of the Wolverhampton Business Group, said it was a doubled edged sword.

"If councils have the power to decrease their rates it's good news. But if there's the power to increase them then the temptation would be there to put them up to make up any funding shortfalls.

"Businesses don't have a vote when it comes to election time, but some would vote with their feet."

The Chancellor hopes the new system will provide an incentive for councils to compete with one another to attract firms and promote business growth. There will be no limit on how low a town hall can cut the local business rate.

Elected mayors seeking to impose a premium will have to demonstrate business support, and the extra levy will be capped - probably at 2p a year.

The Chancellor believes the power to set a premium will encourage more councils to opt for directly-elected mayors.

Local business rates have been set by central government since the uniform national rate was introduced in 1990 by Margaret Thatcher as part of the reform of local government financing which also included the short-lived Poll Tax.

In 2013, councils were enabled to retain 50 per cent of the proceeds of rates, and this will now be increased to 100 per cent by 2020, increasing the cash controlled by local government by £13 billion.

A complex system of tariffs and top-ups, designed to ensure that disadvantaged areas do not lose out by comparison with thriving councils, will be frozen in its current state, meaning that any gains from future growth will go direct to the councils involved.

Central government currently takes in around £11.5 billion in business rates and re-distributes £9.4 billion in grants to councils.

But sources close to the Chancellor said that the change will not represent a loss to the Treasury, as it will be offset by the devolution of extra responsibilities to local authorities.

The chief executive of manufacturers' organisation EEF, Terry Scuoler, said that the proposed reforms to business rates would be 'a real test of local authorities and their ability to better enable local growth', adding: "Local authorities will now be able to prove that they can deliver savings and pass these on to local businesses, enabling them to further invest and create jobs."

Mark Littlewood, director general at the free market thinktank the Institute of Economic Affairs, said: "Today's announcement to devolve business rates and allow councils to collect revenues locally is brilliant news.

"Not only will it create better incentives for councils to encourage local economic growth, it will also instill discipline as their decisions will affect where businesses locate and the wider prosperity of the area."